VIENNA, Austria (AP) — OPEC has promised a sweeping global deal to slash oil production and rescue the collapsed market, but now it has to show it means business.
Analysts predict the package will start unraveling even before it officially takes effect Tuesday — even though some of the oil ministers gathering for emergency talks Monday will likely make the cuts.
“This addresses the problem,” said Peter Bogin, an associate director at Cambridge Energy Research Associates in Paris. “It doesn’t solve the problem.”
OPEC and some newly found friends among non-OPEC producers, including Mexico and Oman, wowed the oil markets last week by announcing production cuts intended to pull crude prices off their recent nine-year low.
The cheap prices have been a bargain for oil consumers but devastating for producers. The weak market has cost OPEC $15 billion in lost revenue this year, Libyan Oil Minister Abdalla Salem el-Badri told reporters Sunday.
After news of the promised reductions, oil jumped about $2 per barrel on New York and London futures markets — and Americans started worrying about gasoline prices rising by a few cents above their recent bargain rates.
But analysts say the rally was fueled by a psychological shift among traders who quickly could go the other way when any actual reductions turn out less than promised. Nobody has yet removed a single barrel from the market, and once the cuts start, they may come up short.
A deal announced last week by Saudi Arabia, OPEC’s top producer, Venezuela, OPEC’s biggest quota buster, and Mexico was initially billed as removing 1.6 million to 2 million barrels a day from the glutted global market.
Analysts figure the real number might be just half that, and they say the Organization of the Petroleum Exporting Countries will find its reputation seriously on the line if it can’t deliver.
OPEC created its own dilemma by agreeing in November to raise stated oil output by 10 percent, just as the Asian economic crisis and the mild winter in key European and U.S. heating oil markets was stifling demand.
For years, the once-powerful oil cartel has failed to function as a cartel, with members openly violating their production quotas and oil prices often widely missing the official target of $21 per barrel.
“This is the last-chance saloon,” said Leo Drollas, chief economist at the Center for Global Energy Studies in London. “If they don’t produce a credible agreement, I think they will be consigned to oblivion, forever. No one will believe they can do anything, even in a crisis.”
OPEC is unlikely to tinker with individual production quotas, which now give the group an official production ceiling of 27.5 million barrels a day, experts say. OPEC is actually producing around 28.7 million barrels a day — and trying to dole out new numbers to all 11 members would likely turn into a nightmare of infighting.
Arrieta said last week that OPEC’s quota system “belongs to history.” Even if Venezuela cuts the 200,000 barrels of daily oil production it has promised, it will be producing 600,000 barrels daily more than its OPEC agreement.
OPEC members are Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.